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Business optimism at highest level since 2014 despite January activity drop

The UK services sector has registered its third month of consecutive decline and the worst performance since May.


Large parts of the UK’s business life had been mothballed by early January. (Victoria Jones/PA)

Large parts of the UK’s business life had been mothballed by early January. (Victoria Jones/PA)

Large parts of the UK’s business life had been mothballed by early January. (Victoria Jones/PA)

Businesses in the UK are more optimistic that things will get better in the future than they have been in nearly seven years, despite new figures showing that activity last month declined at the fastest rate since May.

The UK services sector notched up its third month of contraction in a row, as new lockdown measures were introduced at the start of the month, according to the IHS Markit/CIPS services purchasing managers’ index (PMI).

The country scored 39.5 on the closely followed measure. It was better than the 38.8 that experts had predicted, but still represents a sharp contraction. Anything below 50 is considered a reduction in activity and in December the score was 49.4.

“Temporary closures led to shrinking demand for business services and a ripple effect of corporate spending cutbacks. As a result, total new work fell at the fastest pace since May 2020 and this setback contributed to a steeper rate of job shedding at the start of the year,” said Tim Moore, economics director at IHS Markit, which compiles the survey.

However, businesses think that the situation is likely to get better by this time next year, with around 60% predicting a rise in business activity over the next 12 months. Only 13% expect a decline.

It is the third month that business optimism has improved.

“While the UK economy is on course to contract sharply during the first quarter of 2021, businesses remain confident that pent up demand and an easing of pandemic restrictions will provide a springboard to recovery later this year,” Mr Moore said.

“Positive news on the UK vaccine rollout pushed up business optimism to its strongest since May 2014 and this improvement contrasted with a decline in confidence reported by service providers in the euro area during January.”

By early January all of the UK was in some form of lockdown, with variation between different parts of the country.

The measures have meant that non-essential retailers cannot open, and have placed major restrictions on other parts of the economy.

Researchers found that 41% of businesses that responded to the PMI survey had indicated that their output had declined in January, with only 15% registering an expansion.

The growth was mainly reported in the property sector, with prospective buyers rushing to get a deal over the line before the end of the stamp duty holiday on March 31, as well as the digital services and e-commerce sectors.

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